Indian Partnership Act

SECTIONS OF INDIAN PARTNERSHIP ACT EXTRACTED FROM BARE ACT

4 Definition of " Partnership", "Partner", "Firm" arid "firm name"..

5 Partnership not created by status
6 Mode of determining existence of partnership
7 Partnership at will
8 Particular partnership
9 General duties of partners
10 Duty to indemnify for loss caused by fraud
11 Determination of rights and duties of partners by contract between the partners.
12 The conduct of the business
13 Mutual rights and liabilities
14 The property of the firm.
15 Application of the property of the firm
16 Personal profits named by partners
17 Rights and duties of partners
18 Partners to be agent of the firms
19 Implied authority of partner as agent of the firm
20 Extension and restriction of partner's implied authority.
21 Partner's authority in an emergency_
22 Mode of doing act to bind firm
23 Effect of admissions by a partner
24 Effect of notice to acting partner
25 Liability of a partner for acts of the firm
26 Liability of the firm for wrongful acts of a partner
27 Liability of firm for misapplication by partners
28 Holding out
29 Rights of transferee of a partner's interest
30 Minors admitted to the benefits of partnership
31 Introduction of a partner
32 Retirement of a partner
33 Expulsion of a partner
34 Insolvency a partner
35 Liability of estate of deceased partner
36 Rights of outgoing partner to carry on competing business
37 Right of outgoing partner in certain cases to share subsequent profits
38 Revocation of continuing guarantee by change in firm
39 Dissolution of firm
40 Dissolution by agreement
41 Compulsory dissolution
42 Dissolution on the happening of certain contingencies
43 Dissolution by notice of partnership at will

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44 Dissolution by the
45 Liability for acts of partners done after dissolution
46 Right of partners to have business wound up after dissolution
47 Continuing authority of partners for purposes of winding up
48 Mode of settlement of accounts between partners
49 Payment of firm debts and of separate debts.
50 Personal profits earned after dissolution
51 Return of premium on premature dissolution
52 Rights where partnership contract is rescinded for fraud or misrepresentation
53 Rights to restrain from use of firm name or firm property
54 Agreements in restraint of trade
55 Sale of good will after dissolution
69 Effect of non- registration
72 Mode of giving public notice

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 Indian Partnership Act
ESSENTIAL ELEMENTS OF PARTNERSHIP

1. Association At least two persons should join together to constitute a partnership. The expression
of two or ‘person’ includes juristic person.
more persons
2. Agreement The relation of partnership arises out of an agreement; it is not a product of
status as in joint family business. It also does not arise by operation of law as in
case of co- ownership. Such an agreement between the partners may be express
or implied, oral or written.

3. Business The term ‘business’ includes trade, occupation and profession. Thus, if the
purpose is to carry on some charitable or religious work, it will not be partnership.

4. Sharing of The share need not be in proportion to funds contributed by each partner.
Profits is not Interestingly, though sharing of profit is essential, sharing of losses is not an
the conclusive essential condition for partnership.
evidence

5. Mutual Mutual agency is the Acid test of partnership. It is Cardinal Principle

Agency

Business must Each partner is an agent binding the other partners who are his principals and
be carried on each partner is again a principal, who in turn, is bound by the acts of other
by all or any partners.
of them acting
for all :

Circumstances showing that no partnership exists

Santiranjan Das Gupta Vs. Dasyran Murzamull (Supreme Court)
In Santiranjan Das Gupta Vs. Dasyran Murzamull, following factors weighed upon
the Supreme Court to reach the conclusion the there is no partnership between
the parties:

(a) Parties have not retained any records of terms and conditions of
partnership.
(b) Partnership business has maintained no accounts of its own, which would be
open to inspection by both parties

(c) No account of the partnership was opení with any bank

No written intimation was conveyed to the Deputy Director of Procurement
with Respect to the newly created partnership.

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SEC 6

Mode of determining extence of partnership - In determining whether a group of

persons is or is not a firm, or whether a person is or is not partner in a firm,
regard shall be had to the real relation between the parties, as shown by all
relevant facts taken together. Explanation-
1. The sharing of profits or of gross returns arising from property by Persons
holding a joint or common interest in that property does not of itself make such
persons partners.
In case where However, the receipt by a person of a share of the profits of a business would not
sharing of by itself make him a partner with the persons carrying on the business, particularly,
profit but no when such share of payment is received by the following persons:
having mutual a) a lender of the firm who receives a share of profit
agency b) a widow or child of a deceased partner who receives a share of profit.
c) a servant or agent who receives a share of profit as part of his remuneration.
d) a person who receives a share of profit in consideration of sale of business
or goodwill of the business.

EXAMPLES

1. X agrees with Y to carry passengers by taxi from Delhi to Gurgaon on following Yes
terms, viz, Y is to pay X Rs 100 per mile, X and Y are to share cost of repairing and
replacement of cars, and divide equally between them proceeds of fares received
from passengers
2. X and Y, the co-owner of a house, use the house as a hotel managed either by Yes
themselves
or by a duly appointed manager for their common profits.
3. X agrees with Y a goldsmith, to buy and furnish gold to Y to be worked up by him Yes
and
sold, and that they shall share in the resulting profit or loss.
4. X, a publisher, agrees to publish at his own expense a book written by Y and to pay Y No
half the Net Profit.

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 Indian Partnership Act
TYPES OF PARTNERSHIPS

Partnership at A partnership is said to be partnership at will if –

will Sec 7 a) It is not a partnership for a fixed period, i.e., a partnership in which no
provision is made regarding duration/term of partnership; and
b) It is not a partnership for a particular venture or undertaking, i.e, a
partnership which is not made for a particular venture or undertaking.

Particular Where the agreement between the partners provides that the partnership is
Partnership Sec formed for a certain fixed period of time, it is called as a partnership for a fixed
8 period and for a particular venture it is called as a partnership fora particular
venture. If continued even later it becomes partnership at will.

Dormant 1. A partner who does not attend to the affairs of the firm is called as a
partner dormant
- Is the partner.
identity 2. He does not participate in the conduct of business of the firm.
disclosed
3. His identity is not disclosed to the outsiders and persons dealing with the
- Are
firm.
they
liable ? 4. He is also liable to all the third parties for acts of the firm.
5. He is not required to give public notice of his retirement.

Nominal 1. A partner is called as a nominal partner if-

partner (a) He does not attend to the affairs of the firm;
(b) He does not supply any capital to the firm; and
- Is the
identity (c) He does not share any profits or any other income from the firm.
disclosed 2. The purpose of admitting a partner as a nominal partner is to use the high
- Are status and credibility of such person for the purpose of promoting the business
they of the firm. Thus, a nominal partner lends his name to the firm.
liable ?
3. He has no real interest in the business of the firm.
- Do they
share 4. He is also liable to all the third parties for acts of the firm.
profits
Sub-partner 1. A ‘sub- partner’ is not a partner in the firm. He is transferee of partner’s
unanimous interest
consent req 2. When a partner agrees that some outsider shall be entitled to the whole or
Sec 29 some part of his share of profits and property, such outsider is called as a sub-
partner. Before transferring his share, unanimous consent is required

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RIGHTS OF TRANSFEREE OF PARTNERS INTEREST

Rights during i. During the continuance of partnership, such transferee is not entitled
Continuance a) to interfere with the conduct of the business,
b) to require accounts, or
c) to inspect books of the firm.
He is only entitled to receive the share of the profits of the transferring
partner and he is bound to accept the profits as agreed to by the partners,
i.e., he cannot challenge the accounts.

ii. On the dissolution of the firm or on the retirement of the transferring

Rights on partner, the transferee will be entitled, against the remaining partners:
Dissolution a) to receive the share of the assets of the firm to which the transferring
partner was entitled, and
b) for the purpose of ascertaining the share, he is entitled to an account as
from the date of the dissolution.

PARTNER BY HOLDING OUT/ PARTNER BY ESTOPPEL SEC 28

1) A person to be held liable as a partner by holding out, it is necessary to

establish the following:
a) that he represented himself, or knowingly permitted himself to be
represented as a partner.
b) that such representation was made by words, spoken or written, or by
conduct.
c) that the other party on the faith of such representation gave credit to the
firm which he otherwise would not have given.
d) The liability on the principle of estoppel extends only in the case of credit
given to the firm and not in the case of torts or civil wrongs committed on
behalf of the firm.
2) A partner by holding out is liable to the person giving credit, to make good
the loss, which he may suffer. But thereby he acquires no claim upon the
firm.

PROPERTY OF A PARTNERSHIP FIRM SEC 14

When there is no contract to the contrary, the property of the firm includes:
i. All properties, rights and interests originally brought into as the capital of
the firm, at the commencement of partnership.
ii. The property acquired by purchase or otherwise by or for the firm, at
the commencement of
iii. partnership.

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 Indian Partnership Act
iv. The property acquired with the money of the firm.
v. The good will of the business of the firm.

Goodwill i. Goodwill may be defined as the value of the reputation of a business

house in respect of profits expected in future over and above the normal
level of profits earned by undertaking belonging to the same class of
business.
ii. Goodwill is a part of the property of the firm. It can be sold separately
or along with the other properties of the firm.
iii. Where the property is exclusively belonging to a person, it does not
become a property of the partnership merely because it is used for the
business of the partnership, such property will become property of the
partnership if there is an agreement.

APPLICATION OF THE PROPERTY OF THE FIRM (SECTION 15)

Subject to contract between the partners, the property of the firm shall be held and used
by the partners exclusively for the purposes of the business.

PERSONAL PROFIT EARNED BY PARTNERS (SECTION 16)

According to section 16, subject to contract between the partners -

a) If a partner derives any profit for himself from any transaction of the firm,
or from the use of the property or business connection of the firm or the
firm name, he shall account for that profit and pay it to the firm;
b) If a partner carries on any business of the same nature as and competing
with that of the firm, he shall account for and pay to the firm all profits
made by him in that business.

ADMISSION OF MINOR AS PARTNER SEC 30

As agreement is an essential ingredient in a partnership, it follows that a minor

cannot make a partnership. However, if all the partners agree, minor may be
admitted to the benefits of an already existing firm.

RIGHTS OF MINOR

Only share A minor has a right to such share of profits and the properties of the firm as may
profits or be agreed upon between the partners at the time of admission of the MINOR in
share in such partnership. No loss is borne by Minor.
property
To have A minor can also have access to the accounts of the firm. He can inspect any copy
access to of the accounts of the firm. However, the minor cannot inspect books other than

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accounts account books as they may contain secrets which shall be restricted to major
partners only.

To sue When a minor is not given his due share of profit, he has a right to file a suit for
his share of profits or property of the firm. But, he can do so only if he wants to
severe his connection with the firm.

LIABILITIES OF MINOR

1) Not personally liable for the debts incurred by the firm and due to third
parties. However, his share in the property and profit of the firm shall be
liable.
2) When a firm is declared insolvent, the minor’s share also vests with the
official receiver.
3) He is not entitled to take part in the day-to-day affairs of the firm.
4) He cannot bring any suit against the partners for an account or payment of
his share of property or profit of the firm except when he severs his
connection with the firm.

MINOR HAS TO DECIDE

1) At any time within 6 months of his attaining majority or of his obtaining

knowledge he had been to the benefits of the partnership, whichever date
is latter, the minor may give public notice that he has elected to become a
partner of the firm or not.
2) If he fails to give public notice then he shall become a partner in the firm
on the expiry of 6 months.
3) If he elects to be a partner, or if he fails to give public notice to the effect
If he becomes a that he does not elect to be a partner, he is deemed to have become a
partner partner in the firm on the expiry of the said 6 months. If notice is not
given, he is assumed to be a partner.
If he does not 4) When such a minor elect to become a partner:
becomes a a) he becomes personally liable to the third parties for all acts of the firm
partner done since he was admitted to the benefits of partnership.
b) his share in the property and profits of the firm is the share to which he
was entitled as a minor partner.
5) When such a minor elect not to become a partner:
a) His rights and liabilities continue to be those of a minor up to the date of
the notice.
b) His share is not liable for any acts of the firm done after the date of the
public notice.
c) He is entitled to sue the partners for his share or the property and profits
in the firm.

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 Indian Partnership Act
PARTNERSHIP FIRM AND CO.OWNERSHIP

Co-ownership means joint ownership. A and B jointly purchase a house. They are
the co-owners but not necessarily partners, the following points of distinction
between two maybe noted

PARTNERSHIP CO.OWNERSHIP
It arises from contract. It may, besides contract, arise by status, e.g.,
A and B inherit a house from their father.
It always implies a business. It may exist without any business.
It involves sharing of profits and losses. It does not always involve the sharing of
profits or losses because it may exist without
any business.
Each partner is the agent of other partners. A co-owner is not the agent of the other co-
owners.
A partner cannot transfer his interest without the A co-owner may transfer his interest to a
consent of all other partners. third party without the consent of the
owners.
A partner can claim a share in the surplus/assets of A co-owner can claim division of the joint
the firm, but not a share in the properties of the property in specie.
firm in specie.

PARTNERSHIP DEED

Contents of Partnership Deed: A Partnership deed is a written document in which

the rights and liabilities of the partners are set forth. A partnership deed usually
covers the following points
a) The name of the firm and the names and addresses of its partners
b) Nature of business and town and place in which it is to be carried on,
c) Date of commencement of partnership.
d) The duration of partnership, if any,
e) The amounts of partners capital to be contributed & of raising finance in
future,
f) Withdrawals by the partners.
g) The profit-sharing ratio.
h) Interest to be paid on partners’ capital, loans and interest on their drawings
i) Salary or Commission etc. payable to any partner.
j) System of maintenance of accounts, their audit and safe custody of cash,
etc.
k) Opening and operation of bank accounts.
l) Investments.
m) Allocation of tasks and responsibilities.

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n) Special rules, if any, with regard to death, retirement and admission of a
partner,
o) Expulsion of partner in case of fraud or breach of duty.
p) Whether a partner can carry on a competing business or any other business
or not.
q) The conditions of dissolution partnership,
r) Arbitration clause,
s) Powers of arbitrators.
Note: If the partnership deed is silent in any aspect the Partnership Act shall
apply.

PROCEDURE FOR REGISTRATION OF A PARTNERSHIP APPLICATION FOR REGISTRATION TO BE

SIGNED BY ALL THE PARTNERS

Registrar of Firms is appointed by the State Government

Partnership Deed is drafted, properly, stamped according to Indian Stamp Act.
1. The firm has to file a statement in the prescribed form either in person or by
post with the prescribed
fee, with the Registrar of the Firms of the area in which the firm is situated
or is to be situated.
2. The statement is to state the following particulars:
(i) the firm’s name;
(ii) the principal place of business;
(iii) the names of its other places of business;
(iv) the date of joining of each partner;
(v) the names in full and the permanent addresses of the partners, and
(vi) the duration of the firm.
Statement to be signed by all partners and prescribed fees for registration is to
be given for registration OF FIRMS

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 Indian Partnership Act
CONSEQUENCES OF NONREGISTRATION SEC 69

1. No suit by partners Against other Co- partners or the firm

a) to enforce a right arising from a contract
b) given by the partnership act
2. No suit by the firm Against the third Party for enforcing a right under
a contract
3. No right of set-off to enforce a right arising from a contract

MATTERS NOT AFFECTED BY NON-REGISTRATION

1) The right of third parties to sue the firm or any partner.

2) The right of the partners to sue for the dissolution of the firm or for the
accounts of a dissolved firm or for the realization of the property of a
dissolved firm (i.e., for claiming share of the assets of a dissolved firm or
for recovering money from firm’s debtors).

3) The rights of the firm or partners of firm having no place of business in

India.
4) The right to sue or claim, a set-off if the value of the suit does not exceed
`100
5) The partners have the right to sue for the criminal proceedings against the
other partners of the firm and against the third parties.
6) Rights of a Officials receiver of court to realize the property of an
insolvent partner of an unregistered firm
7) Legal representative of a deceased partner can file suit against the
unregistered firm to demand account of the firm or to realize property of
the unregistered firm

DUTIES AND RELATIONS OF PARTNERS

General duties Partners are bound to carry on the business of the firm to the greatest common
Sec 9 advantage, to be just and faithful to each other, and to render true accounts and
full information of all things affecting the firm to any partner or his legal
representative.Legal representation of deceased partner can file suit against the
unregistered firm account of the firm or to realize property of the firm

Duty to Every partner shall indemnify the firm for any loss caused to it by his fraud in
indemnify for the conduct of the business of the firm.

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loss caused by
fraud (section
10)

Determination (1) Subject to the provisions of this Act, the mutual rights and duties of the
of rights and partners of a firm may be determined by contract between the partners,
duties of and such contract may be express or may be implied by a course of dealing.
partners by Such contract may be varied by consent of all the partners, and such consent
contract may be express or may be implied by a course of dealing.
between the
(2) Agreements in restraint of trade- Notwithstanding anything contained in
partners
section 27 of the Indian Contract Act, 1872, such contracts may provide that
(section 11)
a partner shall not carry on any business other than that of the firm while
he is a partner.

The conduct of Subject to contract between the partners-

the business a) every partner has a right to take part in the conduct of the business;
(section 12) b) every partner is bound to attend diligently to his duties in the conduct of
the business;
c) any difference arising as to ordinary matters connected with the business
may be decided by majority of the partners, and every partner shall have
the right to express his opinion before the matter is decided, but no change
may be made in the nature of the business without the consent of all
partners; and
d) every partner has a right to have access to and to inspect and copy any
of the books of the firm.

Mutual rights Subject to contract between the partners-

and liabilities a) a partner is not entitled to receive remuneration for taking part in the
(section 13) conduct
of the business;
b) the partners are entitled to share equally in the profits earned, and
shall contribute equally to the losses sustained by the firm;
c) where a partner is entitled to interest on the capital subscribed by him
such interest shall be payable only out of profits;
d) a partner making, for the purposes of the business, any payment or advance
beyond the amount of capital he has agreed to subscribe, is entitled to
interest thereon at the rate of six percent per annum;
e) the firm shall indemnify a partner in respect of payments made and
liabilities incurred by him-

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 Indian Partnership Act
IMPLIED AUTHORITY OF A PARTNER SEC 19, SEC 22 & SEC

Meaning A partner’s authority may be express or implied. It is ‘express’, when it is fixed

between the partners by mutual agreement. It is ‘implied’, when the law impliedly
gives certain powers to a partner, i.e., the law presumes that every partner has
to do certain acts unless negative by an express agreement.

Conditions a) The act done by the partner must relate to the normal business of the firm.
For partner’s b) The act must be such as is done within the scope of the business of the
act to bind the firm in the usual way. The usual way depends upon the facts and
firm Sec 19 & circumstances of the case
Sec 22 c) The act must be done in the name of the firm, or in any other manner
expressing or implying an intention to bind the firm.

Examples of a) Purchasing goods on behalf of the firm, in which the firm deals or which
acts falling are employed in the firm’s business.
within the b) Selling goods of the firm.
implied c) Receiving payment of the debt due to the firm and giving receipts for them.
authority of a d) Settling accounts with the persons dealing with the firm.
partner e) Engaging servants for the partnership business.
f) Borrowing money on the credit of the firm.
g) Drawing, accepting, endorsing bills and other negotiable instruments in
the name of the firm.
h) Pledging any goods of the firm for the purpose of borrowing money.
i) Employing a solicitor to defend an action against the firm for goods supplied.

Act beyond In the absence of any usage or custom of trade to the contrary, the implied
Implied authority
Authority of a partner does not extend to the following matters:
19(2) 1) The submitting of a dispute relating to the business of the firm to
Statutory arbitration.
restrictions on 2) Operation of a bank account on behalf of the firm in his own name,
Implied 3) Compromising or relinquishing any claim or portion of a claim by the firm.
Authority 4) Withdrawal of suit or proceeding filed on behalf of the firm.
5) Admitting any liability in a suit proceeding against the firm.
6) Acquisition of immovable property on behalf of the firm.
7) Transfer of any immovable property belonging to the firm
8) Entering into partnership on behalf of the firm.
Note: A Partner can do these 8 matters if (i) he has a specific authority form
partners or (ii) usage/custom of trade.

Implied The partners of a firm may extend or restrict the implied authority but only by
authority of a contract amongst themselves. In spite of such restriction, if a partner does any

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a partner act which falls within his implied authority, the firm will be bound and a third
can be party is not affected by such a
extended or limitation of a partner’s implied authority unless he has actual notice of it. The firm
restricted will not be bound if the third party does not know that he is dealing with a partner
by the deed in a firm.
(Sec 20)

ACT IN EMERGENCY SEC 21

Acts in Over and above the implied authority of every partner; the Act further
Emergency recognizes that each partner can bind the firm by all of his acts done in an
(Sec 21) emergency, with a view to protecting the firm from any loss, provided he has
acted in the same manner as a man of ordinary prudence would have acted in the
like circumstances.

LIABILITY OF THE FIRM FOR ACTS OF A PARTNER

Liability of the The firm is liable to the same extent as the partner (fraud or negligence
Firm for included) for any loss or injury caused to any third party or any penalty by the
Wrongful Acts wrongful act or omission of a partner if either of the following two conditions
of a Partner is fulfilled.
(Sec 26) a) such wrongful act or omission must have been done by a partner while
he was acting in the ordinary course of business of the firm, or
b) such wrongful act or omission must have been done by a partner with
the authority of the other partners.

Liability of firm The firm is liable to the third parties in the following two cases of
for misappropriation by a partner.
misappropriation a) where a partner receives money or property from a third person and
by Partner such partner misapplies it, if the receipt of money or other property by a
partner is within the scope of his apparent authority.
(Sec 27)
b) where a firm, in the course of its business, receives money or property
from a third person and the same is misapplied by any of its partners, if
the partners, has misapplied while the property was in the custody of
firm.

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 Indian Partnership Act
EFFECT OF NOTICE TO ACTING PARTNER (SECTION 24)

Meaning According to section 24 notice to a partner who habitually acts in the business
of the firm of any matter relating to the affairs of the firm operates as notice
to the firm, except in the case of a fraud on the firm committed by or with the
consent of that partner.

LIABILITY OF A PARTNER FOR ACTS OF THE FIRM (SECTION 25)

Meaning Every partner is liable, jointly with all the other partners and also severally,
for all acts of the firm done while he is a partner.

Analysis of The partners are jointly and severally responsible to third parties for all acts
section 25: which come under the scope of their express or implied authority.

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ADMISSION OF PARTNER (SECTION 31)

Conditions A person may be admitted as a new partner, either

(a) with the consent of all the existing partners, or
(b) in accordance with a contract already entered into, between the partners,

Liability of an 1. An incoming partner is liable for all the acts of the firm done after his admission
incoming as a partner.
partner
2. He is not liable for any act of the firm done prior to his admission as a partner.
3. But, by a mutual agreement, the new partners may agree with the old
partners to be liable for the past liabilities of the firm. He will be liable for
the acts of the old firm only if the following two conditions are satisfied:
• The new firm assumes the liabilities of the old firm, and
• The creditors accept the new firm as their debtor and discharge the old
firm from its liability.

RETIREMENT OF A PARTNER (SECTION 32)

Conditions (Sec A partner may retire:

32 (1)) (a) with the consent of all the other partners; or
(b) in accordance with an express agreement already entered into between all
the partners;
(c) where the partnership is at will, by giving notice in writing to all the
other partners.
Liability of the 1. A retiring partner along with other partners, continues to remain liable to
retiring third parties for all acts of the firm until public notice is given on his
partner (Sec retirement. Such a notice may be given either by the retiring partner or by
32 (2)) any member of the reconstituted firm. Also, a retiring will not be liable to a
third party which dealt with the firm without knowing that he was a partner.
Accordingly, no public notice need be given wherea dormant partner retires.
For acts after
retirement 2. A partner, who retires from a firm, does not cease to be liable for the debts
(Sec 32 (3)) or obligations of the firm incurred before his retirement.

For acts before But, by a mutual agreement, the retiring partner may agree with the old partners
Retirement that he shall not be liable for the past liabilities of the firm. He will not be liable
(Sec 32 (4)) for the past liabilities of the old firm only if the following two conditions are
satisfied;
• The new firm assumes the liabilities of the old firm, and

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 Indian Partnership Act
• The creditors accept the new firm as their debtor and discharge the
firm from its liability
Public Notice can be given by
(a) Retired partner
(b) Any partner of reconstituted firm.

Right to carry An outgoing partner may carry on business competing with that of the firm and he
on a competing may advertise such business but he cannot use the name of the firm or represent
business But himself as carrying on the business of the firm or solicit custom of person who are
cannot use dealing with the firm before he ceases to be a partner. However, the partner may
firm name (Sec agree with his partners that on his ceasing to be so, he will not carry on a business
36 (1)) similar to that of the firm within a specified period or within the specified local
limits.

Right to On the retirement of a partner, he has the right to receive his share of the
receive back property of the firm, including goodwill.
his share
(Sec 37)
Right to share Where the continuing partners carry on the business of the firm with the property
profits/ of the firm without any final settlement of account, the outgoing partner is
interest Sec entitled to claim such share of the profits made by the firm, since he ceased to
37 be a partner. In the alternative, he can claim interest at the rate of 6% per
annum on the amount of his share in firm’s property.
1) Even the representatives of a deceased Partner can claim share in subsequent
profits.
2) When by a contract between partners, an option to purchase the interest of
Outgoing partner was exercised by other partners, then Outgoing partner
will not be entitled to any further share of the profits.
Outgoing Partner: He is a person who leaves the firm, while the other continue the
Partnership. A partner may go out due to retirement, death, insolvency or expulsion

Continuation of Unless the partnership agreement otherwise provides, the remaining partners
business of the have the right to continue the business of the firm.
firm Above rights are also available with the legal representative of a deceased partner
whose accounts are not settled by the continuing partner

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Indian Partnership Act

EXPULSION OF A PARTNER (SECTION 33)

1. A partner shall not be expelled from a firm by a majority of partners except

in exercise, in good faith, of powers conferred by the contract between the
partners. It is essential that:

(a) the power of expulsion must have existed in a contract between the
partners;

(b) the power has been exercised by a majority of the partners; and

(c) it has been exercised in good faith.

Note: 1. If expulsion is proper then his rights and liabilities are that of retired one.
If these conditions are not satisfied then expelled partner may claim
reinstatement or sue for the refund of his share of capital & profits of his
firm

2. The test of good faith as required includes three things:

Test of good
faith (a) that the expulsion must be in the interest of the partnership.

(b) that the partner to be expelled is served with a notice,

(c) that he is given an opportunity of being heard

3. If a partner is otherwise expelled, the expulsion is null and void. The only
remedy, when a partner misconduct’s in the business of the firm, is to seek
judicial dissolution

4. The rights, liabilities, continuation of the business of the firm and other
provision of the act will equally apply to an expelled partner as if he was
retired partner.

INSOLVENCY OF A PARTNER (SECTION 34)

The effects resulting from the insolvency of a partner may be summed up as

follows:

(a) The insolvent partner ceases to be a partner on the date on which the order
of adjudication is made. A public notice to the effect that a partner has been
adjudicated insolvent is not required.

(b) The estate of the insolvent is not liable for the acts of the firm done after
the date of the order of adjudication.

(c) The firm is not liable for any act of the insolvent partner after the date of

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 Indian Partnership Act
the order of adjudication.

(d) The firm is dissolved on the date of the order of adjudication, but the
partners may specifically provide that on such a contingency the Firm shall
not be dissolved.

DEATH OF A PARTNER (SECTION 35)

The effects resulting from the death of a partner may be summed up as follows:
a) The partner ceases to be a partner on the date of his death. A public notice
to the effect that a partner has died is not required.
b) The estate of the deceased partner is not liable for the acts of the firm
done after the date of his death.
c) The firm is not liable for any act on behalf of the deceased partner after
the date of his death.
d) The firm is dissolved on the date of the death of a partner but the partners
may specifically provide that on such a contingency the firm shall not be
dissolved.

BASIS OF DISSOLUTION OF FIRM DISSOLUTION OF PARTNERSHIP

DIFFERENCE
Continuation of It involves discontinuation of It does not affect continuation of
business business in business. It involves only
partnership. reconstitution of the firm.
Winding up It involves winding up of the firm and It involves only reconstitution and
requires realization of assets and requires only revaluation of assets and
settlement of liabilities. liabilities of the firm.
Order of court A firm may be dissolved by the Dissolution of partnership is not
order of ordered
the court. by the court.
Scope It necessarily involves It may or may not involve dissolution
dissolution of of firm.
partnership.
Final closure of books It involves final closure of books of It does not involve final closure of
the firm. the
books.

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Indian Partnership Act

1) DISSOLUTION WITHOUT ORDER OF THE COURT

Dissolution means dissolution of partnership of firm between all the partners of

the firm.
A firm may be dissolved –
a) with the consent of all the partners, or
b) in accordance with a contract between them.
c) The contract for the dissolution of the firm may be express or implied.

2) COMPULSORY DISSOLUTION (SECTION 41)

(a) By the adjudication of all partners or all the partners but one as insolvent.
The reason for this is simple.

(b) By the happening of any event which makes it unlawful for the business of
the firm to be carried on, or for the partners to carry it on in partnership.
If any one of the ventures of partnership becomes unlawful, partnership firm
cannot be dissolved.

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 Indian Partnership Act
3) DISSOLUTION ON THE HAPPENING OF CERTAIN CONTIGENCIES (SEC 42)

Subject to a contract between the partners, a firm is dissolved by-

a) the expiry of the term for which the firm was constituted,
b) the completion of the particular adventure or adventures, if the firm is
constituted for the execution thereof,
c) the death of a partner, and
d) the adjudication of a partner as an insolvent.

4) DISSOLUTION BY NOTICE OF PARTNERSHIP - AT - WILL (SECTION 43)

Where the partnership is at will, the firm may be dissolved by any partner giving
notice in writing to all the other partners of his intention to dissolve the firm [sec.
43 (1)]. The firm, in such a case, is dissolved as from the date mentioned in the
notice as the date of dissolution or, if no date is so mentioned, as from the date of
the communication of the notice. Under Sec. 44, the Court may, at the suit of a
partner, dissolve a firm on the following grounds:

DISSOLUTION BY COURT (SECTION 44)

1. Insanity Where a partner has become of unsound mind, the Court may dissolve the firm on
the petition of any of the other partners or by the next friend of the insane partner.

2. Permanent Where a partner, other than the partner suing, has become in any way permanently
incapacity incapable of performing his duties as a partner, the Court may dissolve the firm.

3. Misconduct Where a partner, other than the partner suing, is guilty of misconduct and it is
likely to affect prejudicially the carrying on of the business, regard being had to
the nature of the business, the Court may dissolve the firm. Misconduct may be
related to some other matter not connected with partnership.

4. Persistent Where a partner, other than the partner suing, willfully or persistently commits
breach of breach of the partnership agreements relating to the management of the affairs
agreement of the firm or the conduct of its business, or otherwise so conducts himself that
it is not reasonably practicable for the other partners to carry on the business of
the firm with him, the Court may, at the instance of any of the other partners,
dissolve the firm [Sec. 44 (d)].

5. Transfer of Where partner has in any way transferred the whole of his interest in the firm
interest to a third party or where his share has been attached under a decree, or sold in
the recovery of arrears of land revenue, the Court may dissolve the firm at the

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Indian Partnership Act

instance of any other partner.

6. Business Where the business of the firm cannot be carried on except at a loss, the Court
working at may dissolve the firm at the suit of a partner [Sec. 44(e)].
loss
7. Any other The court may dissolve a firm on any ground which renders it just and equitable
ground than the firm should be dissolved.
a) Deadlock in the management.
b) Where the partners are not in talking terms between them.
c) Loss of substratum.
d) Gambling by a partner on a stock exchange.

SETTLEMENT OF ACCOUNTS (SECTION 48)

Treatment of Losses, including deficiencies of capital, shall be paid first out of profits, next out
losses : of capital and lastly, if necessary, by the partners individually in the proportions in
which they were entitled to share profits.

Application of The assets of the firm, including any sums contributed by the partners to make
assets up deficiencies of capital, shall be applied in the following manner:
(a) in paying the debts of the firm to third parties;
(b) in paying to each partner rate ably what is due to him from the firm for advances;
(c) in paying to each partner rate ably what is due to him on account of capital;
and
(d) the residue, if any, shall be divided among the partners in the proportions in
which they were entitled to share profits, Learning technique OACP.

Firm’s assets In settling the accounts of a firm after dissolution, the goodwill shall be included
to include in the assets, and it may be sold either separately or along with other property
goodwill of the firm.

Public notice of registration (SEC 45)

When public Even after dissolution the partners continue to be liable as such to third parties
notice is not for any act of the firm, as if done before the dissolution, until public notice is given
given of the dissolution. Hence such a creditor may proceed against all or any of the
partners for any debt contracted by any of the partners for the firm, after its
dissolution

Mutual agency When public notice is given of the dissolution of the firm, No partner has the
continues authority to bind the firm except for certain specific purposes i.e., after the

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 Indian Partnership Act
dissolution of the firm the authority of each partner to bind the firm and the
other mutual rights and obligations of the partners continue:

• So far as may be necessary to wind up the affairs of the firm, and

• To complete transactions begun but unfinished at the time of the dissolution.

CONTINUING AUTHORITY OF PARTNERS FOR PURPOSES OF WINDING UP (SEC 47)

Mutual agency After the dissolution of a firm the authority of each partner to bind the firm, and
will continue the other mutual rights and obligations of the partners, continue notwithstanding
for the the dissolution, so far as may be necessary to wind up the affairs of the firm and
purpose of to complete transactions begun but unfinished at the time of the dissolution, but
winding up nototherwise:

Provided that the firm is in no case bound by the acts of a partner who has been
adjudicated insolvent; but this proviso does not affect the liability of any person
who has after the adjudication represented himself or knowingly permitted himself
to be represented as a partner of the insolvent.

RIGHTS AND OBLIGATIONS OF PARTNERS ON THE DISSOLUTION OF FIRM

Right to have On dissolution, every partner is entitled as against all the other partners to have
business wound the property of the firm applied as follows:
up Sec 46 • In payment of outside debts and liabilities of the firm,
• In settling the rights of the partners-by distributing the surplus
between them.

Right to have On dissolution, the debts of the firm shall be settled out of the property of the
the debts of the firm, and if there is any surplus, it would be utilized towards the payment of the
firm settled out private debts of the partner or paid to him. Similarly, as regards private debts
of the property of the partners, the private estate shall first be applied in payment of private
of the firm Sec debts and if there is a surplus, and if there be a need, it shall be utilized towards
49 the settlement of the debts of the firm.

Right to personal Where any partner has bought the goodwill of the firm, he shall have a right
profits earned to use the firms name and earn profit as a result of it. He shall not have to
after dissolution account for such profit to the firm.
Sec 53

Right to return Where a partner, has paid a premium on entering into partnership for a fixed
of premium on period term and the firm is dissolved prematurely, he shall be entitled to the
premature whole or part of the premium, regard being had to (i) the terms upon which he
dissolution (Sec

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Indian Partnership Act

51) became a partner, and (ii) the length of the time during which he was a partner
Premium is not unless-
returned if • The dissolution is mainly due to his own misconduct, or
• The dissolution is in pursuance of an agreement containing no provision for
the return of the premium or any part of it.
Rights of A Contract creating partnership is rescinded on the fraud or misrepresentation of
indemnity when any parties thereto. The party entitled to rescind, is entitled to-
partnership is a) A lien on/right of retention of the surplus asset of the firm remaining
rescinded for after settlement of Firm’s debts, for any sum paid by him for purchase of
fraud or share or for contribution of capital
misrepresentation b) Rank as a unsecured creditor of the firm in respect of any payment made
Sec 52 by him for the firm’s debts
c) Be indemnified by the partner’s guilty of such fraud or misrepresentation
against all debts

Right to restrain After a firm is dissolved, every partner may restrain any other partner from
from use of firm carrying on a similar business in the firm name or from using any of the property
name or firm of the firm for his own benefit, until the affairs of the firm have been completely
property wound up. In the following two cases, this restriction does not apply (a) when
there is a contract between the partners to the contrary, and (b) when a partner
has bought goodwill of the firm.

Rights to Carry a) When the firm’s goodwill is sold upon dissolution, a partner may carry on
on business when competing business with that of the buyer of good will.
good will is sold: b) However, in view of an agreement with the buyer of goodwill the partner
Sec: 55 may not-(a) use the Firm’s name (b)represent as carrying on of the firm’s
business, (c) solicit the Firm’s customers.
c) The partners shall not carryon competing business for such specified
period and within specific local limits if there is any special agreement
between the parties thereto.

PUBLIC NOTICE (SECTION 72)

When a Public A Public notice is required to be given in the following three cases:
Notice to (a) on the retirement or expulsion of a partner, or
Required to be
(b) on the dissolution of the firm,
Given:
(c) on the election to become or not to become a partner by a minor on his
attaining majority.

When a Public A public notice is not required to be given in the following two cases:
Notice is not • on the death of a partner
Required to be
• on the insolvency of a partner.
Given

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 Indian Partnership Act
Mode of Giving The mode of giving public notice is given as under:
Public Notices In case of a registered firm In case of an unregistered firm
(a) It must be given by publication in It must be given by publication in
the Official Gazette. the Official Gazette.
(b) It must be given by publication in It must be given by publication in
at least one vernacular newspaper at least one vernacular newspaper
circulating in the district where the circulating in the district where the
firm to which it relates has its firm to which it relates has its place
place or principal place of business. or principal place of business.
(c) It must be given to the Registrar
of Firms

Sec 30(1) -Admission Sec 12(c)-making a

of a minor into the change in the nature

benefits of firm. of the business

Matters requiring

unanimous consent
of the Partners

Transfer by a Partner
Sec 31(1)- For
of his interest in the
admission of a new
Firm
Partner

REVOCATION OF CONTINUING GUARANTEE BY CHANGE IN FIRM (SEC 38)

According to section 38, a continuing guarantee given to a firm or to third party

in respect of the transaction of a firm is, in the absence of an agreement to the
contrary, revoked as to future transactions from the dateof any change in the
constitution of the firm.
Eg: X gave guarantee to a third party for ABC & Firm for a series of transactions
for the coming 6 months. C retires after 2 months. For next 4 months continuing
guarantee is Revoked.

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